Australian Exchange Plans High-Frequency Venue to Counter Chi-X

ASX Ltd., operator of Australia’s stock exchange, plans to open a second equities market aimed at professional speculators to head off competition after regulators effectively ended its monopoly on trading. Photographer: Ian Waldie/Bloomberg

March 15 (Bloomberg) -- ASX Ltd., operator of Australia’s
stock exchange, plans to open a second equities market aimed at
professional speculators to head off competition after
regulators effectively ended its monopoly on trading.

PureMatch, a platform for high-frequency traders whose
computerized strategies dominate U.S. markets, will start in the
third quarter, said Richard Murphy, general manager for equity
markets at Sydney-based ASX. PureMatch will complement ASX’s
main market and provide access to the country’s 200 most-popular
securities, he said.

Modernization is being forced on the country’s main bourse
after the Australian Securities & Investments Commission cleared
a timeline this month that will allow Chi-X Global Inc. to set
up a competing exchange. ASX agreed in October to be acquired by
Singapore Exchange Ltd., run by Chief Executive Officer Magnus
Bocker, who oversaw Nasdaq OMX Group Inc.’s European expansion
after an acquisition spree in the 2000s as head of OMX AB.

“Provided it’s done well and governed properly,
competition should be welcomed,” said Tim Schroeders, a money
manager in Melbourne at Sydney-based Pengana Capital Ltd., which
manages about $1 billion. “The status quo of having a monopoly
exchange environment is suboptimal in terms of pricing for
participants.”

Chi-X Global, owned by Tokyo-based Nomura Holdings Inc.,
aims to capture as much as 10 percent of equity volume in its
first year, said Peter Fowler, the chief operating officer of
the Australian subsidiary. Chi-X was cleared to become the first
foreign-owned market operator on March 3 after applying in 2008.
The venue may open as early as Oct. 1, Fowler said.

Market Value Surges

Introducing competition to Australia’s market is part of
plans by the Labor Government, led by Prime Minister Julia
Gillard, to help turn the country into a global financial hub.
The value of Australian stocks has increased to $1.42 trillion
from $629.8 billion at the end of 2004, according to data
compiled by Bloomberg, as China’s growth spurred rallies in
energy and mining companies.

More than 35 percent of ASX’s trading comes from investors
and brokers outside the country, Murphy said. While overseas
investment is growing, the proportion will probably stay about
the same because of laws that will boost employer contributions
to pension funds, he said.

High-frequency trading is used in strategies from
electronic market making to statistical arbitrage and
proprietary algorithmic models where speed of execution may be
critical to profitability. While it accounts for more than 60
percent of American share volume, penetration has been lower in
countries where exchanges face less competition.

High Frequency

ASX’s platform aimed at high-frequency firms will be
segregated from its main market, TradeMatch, and have different
rules, although traders will have access to both. The venue will
ban orders that are hidden from public view, used by
institutions to disguise their intentions and considered a
nuisance by high-frequency firms.

The top 200 companies provide more than 90 percent of the
exchange’s revenue from trading, according to Murphy.

“We observed developments in America over the last 10
years and what Mifid has done in Europe,” he said, referring to
Europe’s Markets in Financial Instruments Directive rules for
competition among exchanges. “We’ve learned the lessons from
what worked and what hasn’t worked elsewhere around the world.
You can’t have one model that satisfies both high-frequency
traders and block traders since they both want fundamentally
different things.”

Single Market

Chi-X Australia is betting on a single market that appeals
to companies who want quick transactions and are likely to place
standing orders to buy and sell equities on its computers, a
process known as adding liquidity.

“Success will come from an amalgam of high-frequency
traders, retail and institutional orders, where they all play in
the same sandpit,” Fowler said. “The mix of trading is a key
difference with our market.”

Since filing for its Australian license in 2008, Chi-X
Global has introduced markets in Singapore and Japan. It
operates one in Canada that captured 9 percent of equity trading
last year, according to that country’s regulator.

“Australia is quite important,” Fowler said, adding that
high-frequency firms based in the U.S. have expressed an
interest in Australia. “It punches above its weight in terms of
capital markets. In language, law and other respects, it’s also
an easy country for people to connect to and trade into.”

Broker Clients

About a dozen brokers are likely to be connected to Chi-X
when it begins trading later this year, Fowler said. More than
90 percent of business may initially come from domestic brokers,
with trading from foreign companies eventually increasing, he
said. The venue will also compete with ASX by allowing brokers
to report pre-arranged trades to its market.

Traders base decisions on where to send orders partly on
the standards for handling them that each venue maintains. Like
ASX, Chi-X will match publicly displayed buy and sell equity
requests at the same price in the order they are submitted,
using a trading model known as limit order book.

Chi-X also plans to employ maker-taker pricing, used in the
U.S. for more than a decade, in which markets pay firms to
provide bids and offers and charge others to trade against them.

ASX urged Australian regulators in January to ban the
maker-taker standard, saying it distorts pricing, offers
incentives to one side of the trade and may spur an
“explosion” of high-frequency business. ASX, which hasn’t
decided on the type of fees to apply on PureMatch, may turn to
market makers to attract orders, Murphy said. The exchange uses
market makers for options and exchange-traded funds.

Anonymous Platform

ASX began an anonymous platform for block equity trades
last year called VolumeMatch and another that executes orders at
the midpoint of the best bid and offer. It also moved to a new
trading platform called ASX Trade, based on New York-based
Nasdaq OMX Group Inc.’s Genium Inet technology. The Singapore
exchange is also switching to a new trading platform powered by
Nasdaq OMX’s system in August.

The Australian exchange operator expects to complete a data
center later this year to house its technology infrastructure
and expand the use of co-location, in which customers place
servers near the engines that match buy and sell orders, Murphy
said. The setup allows firms to reduce the time it takes to
receive an execution or confirm their order was canceled.

ASX will be able to accommodate up to 300 racks for
customers’ computers, up from about 70 now, he said.

ASX is “becoming more commercial ahead of the inevitable
competition about to hit the market and is trying to engender
customer loyalty ahead of changes,” Schroeders said.